As you jump into your shiny new car and drive off the forecourt, the last thing on your mind is likely to be how the value of your new wheels has already dropped by a third.
It’s a sobering thought, but according to the AA, car depreciation is a driver’s biggest cost after fuel purchase. Over a period of three years, the average new car loses around 60% of its value; so if your car cost £35,000 new, it could have plummeted to just £14,000 after three years. A car costing £20,000 when purchased could be only £8,000 after the same period.
Things can become trickier if you are unlucky enough to have your car stolen, or if it is written off following an accident. Your insurer will pay out what it’s worth – at the time.
Given that a car’s value depreciates so rapidly, this is likely to be considerably less than what you paid when you bought it, especially if the car was brand new. This means that when you get a replacement car, there’s a difference between what you paid for the vehicle and what your insurer has paid out.
That’s where GAP insurance comes in.
Bridging the gap
The purpose of GAP (Guaranteed Asset Protection) insurance is to make up the difference between what you spent on the car, and your motor insurance payment. There are four types:
Return to invoice cover: If your car is written off, this covers the amount between the market value at that time and the original invoice price you paid for the vehicle. Therefore, if you add the settlement from your motor insurer to the settlement from your gap insurance policy, you will get the original price back.
Return to value cover: This insurance pays out the difference between what the motor insurer pays (a ‘total loss’ payment) and the value of your car when you took out GAP cover.
Vehicle replacement cover: This protects between the vehicles market value when it is written off and the cost of replacing the vehicle with the replacement model. Therefore, if you bought a one year old car for £13,000, four years later the equivalent one year car could be £15,000. VRI cover will return you the £15,000 figure.
Finance cover: This pays the difference between your insurers ‘total loss payment’ and the outstanding amount you have if you have paid for your car with a finance loan.
When to consider it
Gap insurance is a lot more useful with new cars because they depreciate at a quicker rate.
If you have bought your car on finance and it’s written off or stolen, you are going to have to pay back the loan regardless. Although your insurer will pay out what it’s worth at the time, you will still be paying off the lone to the value of what the car was when you bought it.
When it may not be helpful
If you aren’t worried about your cars depreciation then there isn’t much point buying gap insurance. Your insurer will pay out for a replacement so you’ll get a car that’s like-for-like to the model you had before.
If your vehicle is less than 12 months old and you have fully comprehensive insurance, many insurance policies offer ‘new car replacement’ during the first 12 and even 24 months. Therefore, if you are still in this period, you may not need gap insurance.
Gap insurance isn’t always useful for used cars. This is because a used car won’t fall in value at the same rate as a new car.
Our personal injury solicitors are on hand to talk everything through and answer any questions you may have.
You can enquire by completing our contact form below or by calling us direct on 0333 305 8575.Our friendly team will talk everything through and advise you on your options.